BOSTON, FEB. 25, 2016....An investigation launched in December into the MBTA Retirement Fund has slowed state government's financial reporting and now the lack of audited financials threatens to affect the Commonwealth's bond covenants, subject the state to lawsuits, and draw a critical eye from investors and credit rating agencies.
A six-month examination of the MBTA pension fund by Wall Street whistleblower Harry Markopolos "found accounting and investment reporting practices that he says may overstate the financial health of the transit worker retirement plan by as much as $470 million," the Boston Globe reported in June 2015.
Markopolos, who gained widespread attention for identifying Bernie Madoff's fraud, told the Globe the $1.6 billion fund's performance appeared "too good to be true" and said the health of the plan may be overstated by $470 million.
The retirement fund in December hired an outside firm to review the fund's financials, but because the timing of the investigation's conclusion is unclear, as well as the results, the Massachusetts Department of Transportation has been unable to sign off on financial statements. Comptroller Thomas Shack needs those statements to complete a final Comprehensive Annual Financial Report (CAFR) for fiscal 2015, which ended on June 30, 2015.
The final CAFR was due Jan. 13. Shack instead filed an interim report and then on Feb. 16 released a draft unaudited financial report. He said there's been "virtually no communication" from the MBTA Retirement Fund, which authorized the investigation into the accuracy of the fund's pension-related assets and liabilities.
Shack plans to delay filing the final CAFR until the firm hired by the retirement fund completes its investigation, the independent auditors of the fund complete the audit of its financial statements, and the Commonwealth receives audited financial statements from the MBTA and Massachusetts Department of Transportation.
How long that will take remains unclear, and is emerging as a concern.
"This is an unusual year and an unusual circumstance," said Shack, who added that he's spoken to his predecessors and concluded that it's a year "unlike any year that we've ever had."
During a meeting of the Comptroller's Advisory Board on Tuesday, board member Michael Esmond asked about ramifications if the final report is not filed soon.
Shack said there was an analysis underway of potential impacts for bond covenants, and mentioned conversations that he said involved Treasurer Deborah Goldberg's office, Gov. Charlie Baker's office and the Executive Office of Administration and Finance.
"We do think the middle of June is a significant timeframe for us," said Shack, who declined to elaborate on why June was significant.
Shack said he would have a contingency plan in case he was unable to file the report before June.
State Treasury officials, who agreed to speak to the News Service about the issue on background, zeroed in on the issue. They said bond covenants - legal agreements between bond issuers and bondholders - require an audited CAFR to be filed within 350 days of the end of the fiscal year, a deadline that would hit in June 2016. The filing requirement is part of a Securities and Exchange Commission rule, according to bond documents.
Missing that deadline would constitute a default on that requirement and bondholders would have remedies that are non-monetary in nature, according to a Treasury official. Bondholders could sue the Commonwealth and demand audited statements, the official said on Tuesday, and investors could begin asking questions.
"We know the rating agencies have asked some questions," the Treasury official said. "We do expect to get some questions on it. It's an unusual situation."
"We're obviously concerned," said advisory board member Catharine Hornby, assistant secretary for budget within Gov. Charlie Baker's administration, who said officials were discussing the matter to develop strategies to address it.
Another Baker administration official, speaking on background, emphasized that the governor's team was working with the treasury and comptroller's office and is confident about developing a solution should the holdup not be resolved before June. The official acknowledged the potential gravity of the situation. "Anytime we're talking about bond covenants, it's a big deal," the official said.
Shack said that since the MBTA Retirement Fund is a private trust state officials are unable to compel them to make public disclosures. He added that since the MBTA receives public funds the retirement fund has the option to be more forthright with information and said he would "love to see more communication and transparency."
The MBTA Pension Fund received $62.564 million in public funds in fiscal 2014, according to the comptroller's office, and $70.6 million in fiscal 2015.
Shack was asked about the MBTA Pension Fund during an investor's call Wednesday ahead of planned state borrowing next week.
"We don't have a final resolution timeframe in mind but we are hopeful that the investigation is proceeding expeditiously and that the results will be issued as soon as that's complete," Shack said, after he was asked by Steve Percoco of Lark Research, an independent provider of investment research, how long he could go with unaudited statements.
The Globe reported in June that Markopolos, who worked on the pension fund issue with Boston University finance professor Mark Williams, presented the findings of their 103-page report to officials from the US attorney's office, the FBI, the Securities and Exchange Commission, and the Massachusetts inspector general's office.
Truth in Accounting, a Chicago group that analyzes public pensions, reviewed the report's findings for the Globe. "They brought up very good points that deserve investigation," Sheila Weinberg, chief executive, told the Globe in June.
In an October newsletter, MBTA Retirement Fund Executive Director Michael Mulhern said the fund made requests for the Markopolos Report but that it had not been shared with the fund's board of trustees.
According to MBTA Retirement Fund spokesman Steve Crawford, the independent consultant hired to review the fund's financials, FTI Consulting, has not received a copy of the report. Crawford said the board expects to receive FTI's review by the end of February and declined to comment on the broader issues raised by state officials.
In addition to dealing with the delay of his first CAFR, Shack is also overseeing the government-wide institution of new Government Accounting Standards Board reporting requirements that require full reporting of unfunded pension liabilities.
"This has so far been remarkably challenging," Shack said, crediting the work of his 117-member staff.
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02/25/2016